5/03/2007 @ 6:00AM

How To Set Up An Advisory Board

Whether you have 10 employees or 1,000, having a reliable group of advisers who can offer objective analysis and a few timely introductions can make all the difference.

Slightly different from a board of directors, which is required of some private companies in many states, an advisory board serves more of a mentorship role. Its members have no fiduciary responsibility to the company or its stakeholders.

Young, growing companies stand to benefit most from advisory boards, says Richard Magid, president of SoundBoard, a consultancy specializing in creating and running advisory boards: “An advisory board is good for that independent eye. It helps ask questions beyond just what is on the first line of the profit and loss statement.”

And with business regulations growing more complex and transactions more international, the number of companies with advisory boards has crept up, says Paul Dorf, managing director of Compensation Resources, a New Jersey-based executive pay consultancy.

Here are six tips for building your own indispensable advisory board.

Where To Look

Start with who you know and trust. Lawyers and bankers are no-brainer additions to any advisory board. Beyond the inner circle, troll your local small business development center, SCORE (Service Corps of Retired Executives) office or industry association. A riskier option: customers and vendors who might have good connections in the industry. Just be careful what you tell them; better yet, have them sign confidentiality agreements.

Three’s Not Always A Crowd

Smaller companies with no more than 20 employees typically have up to three advisers, according to the National Federation of Independent Business. (An odd number is nice in case you’re looking for a swing vote on a key decision.) Just don’t load up the kitchen with cooks: More than six or seven advisers is probably too many, says Magid.

Find A Big Name Or Two

Perhaps the greatest asset an adviser lends is credibility–with clients, employees and investors. “You want someone who validates your solution, with a name you can bank on,” says Amy Millman, president of Springboard Enterprises, which counsels women-run start-ups. “Advisers are people who open doors.”

Balance Is Best

Smart advisers are good, but you also want a spread of perspectives and skills that complement your own. One person might be an expert on technological trends, while another might keep you honest about your financial projections.

What To Pay

Many mentors will sit on a start-up’s advisory board for no pay. After all, they want to network with other industry players and to build their own credibility. Still, about 20% of small businesses offer some kind of compensation, if just enough to cover traveling costs to and from meetings. (The price tag climbs as companies grow: According to Compensation Resources, almost 91% of firms with $50 million to $100 million in revenue pay their advisers; average compensation: $4,800 per year.) Equity is an option, too, but the advice better be really good.

Shelf Life

Recruit your advisers on a short-term basis: The advice your business needs at $500,000 in sales is different from what it needs at $5 million (see “Twelve Tips To Keeping Your Company Growing”.) Set adviser term limits from 12 to 24 months so that you don’t have to deal with sudden, awkward dismissals. You may only hold meetings a handful of times a year, but check in more often than that. You don’t want to fall off your mentors’ radars.